The present economic downturn is expected to weigh heavily on the Nigerian banking sector in 2020, with loan growth projected to decelerate from 14 per cent year-on-year in 2019, to 2.5 per cent in 2020.
Fitch, one of the leading global rating agencies made the prediction in its latest: “Nigeria Banking & Financial Services Report.”
However, the firm anticipated that loan growth would improve slightly in 2021, to 4.3 per cent. Fitch stated that downside risks in the sector are elevated due to the Covid-19 pandemic and a weakened oil sector.
It further stated that demand for credit was set to weaken amid reduced economic activity and elevated uncertainty among consumers and businesses, while deteriorating asset quality will make banks more cautious in issuing loans.
“Increased government borrowing from domestic banks will help to support asset growth over the coming years. That said, there are risks of this crowding out private borrowers from receiving credit, hampering the economy’s long-term recovery.
“We expect that the oil sector downturn and government measures to limit the domestic spread of Covid-19 will cause Nigerian loan growth to slow significantly over 2020.
“Since 2015, the oil and gas sector has accounted for an average of 28.8 per cent of total commercial bank private sector loans, which has left the banking sector highly exposed to external oil price shocks,” it added.
It noted that the 2016 recession caused by falling oil exports and the subsequent years of economic weakness weighed significantly on loan issuance, with credit extension falling by an average of 2.4 per cent between July 2017 and June 2019.
In July 2019, the Central Bank of Nigeria (CBN) introduced a minimum loan-to-deposit ratio (LDR) of 60 per cent for commercial banks in order to bolster loan issuance, with penalties for failing to reach this.
A number of banks missed the target, leading to levies exceeding a total of N400 billion in September and the CBN raising the minimum LDR to 65 per cent.
Nonetheless, growth of commercial bank loans to the private sector has since accelerated to 13.8 per cent year-on-year in February 2020. “However, we expect this growth to slow over 2020 as the economy returns to recession. Demand for credit is set to weaken due to reduced economic activity and elevated uncertainty among consumers and businesses.
“With the oil sector accounting for over 90 per cent of exports – and having strong linkages with other industries -this year’s sharp decline in oil exports will weigh on the wider economy and be a driving factor behind real GDP contracting by 3.5 per cent in 2020,” it added.
Furthermore, the rating agency noted that following a 15 per cent currency devaluation in March, it expects that reduced exports and a decline in foreign currency reserves would, “prompt the CBN to further weaken the naira towards N410/USD by the end of 2020.”
“We expect that the weaker currency will contribute to inflation accelerating from an average of 11.4 per cent in 2019 to 13.5 per cent in 2020, weighing on purchasing power and credit demand.
“Additionally, we expect restrictions on public gatherings and uncertainty among consumers and businesses due to the pandemic to dampen potential borrowers’ appetite for loans,” it added.
According to the report, despite the CBN’s minimum LDR policy, banks are likely to struggle in issuing large amounts of credit, even if this results in further charges which threaten profitability.
“Asset quality is also likely to deteriorate this year, making banks more cautious about lending. Nigeria’s ratio of nonperforming loans (NPLs) to total loans rose from 5.3 per cent in fourth quarter 2015 before the recession to as high as 15.1 per cent in third quarter 2017.
“The rise in NPLs was driven primarily by the oil sector’s 2016 downturn and widespread weakness in following years,” it added.